Elf on the Shelf founders' sleigh ride to success

FORTUNE — Don’t like rhyming? It may seem you’re alone, as the Elf on the Shelf and its story, written entirely in verse, flood storefronts and friends’ homes alike this holiday season. Since its launch in 2005, the Christmas tradition snowballed from poem to multi-million dollar franchise: year-over-year growth has averaged 149%, sales hit $16.6 million in 2011, CBS premiered The Elf on the Shelf: An Elf’s Story last December, and a helium-filled Elf on the Shelf floated through Herald Square during Macy’s Thanksgiving Day parade in November.

After a bout of empty nest syndrome, Carol Aebersold wrote the story with her daughter Chanda Bell. It’s the tale of a scout elf who reports children’s behavior to Santa every night, then flies back to their homes in the morning; it’s a bit of hide-and-seek with the elf. They then recruited Bell’s twin Christa Pitts to quit her job as a QVC host and launch their publishing company, Creatively Classic Activities and Books (CCA&B). The three women, as saccharine as they are blue-eyed, discuss Santa as if he’s a mere sleigh ride away. After researching the best toy manufacturers, Aebersold claims, “We found Santa, who brought us the elves.” Pitts laughs, verifying that elves all come from the North Pole. (They don’t really. They’re manufactured overseas.)

A portrait of a stubborn Southern family lay under the fluff; scrappy and passionate, the women self-published five thousand $30 box sets seven years ago after countless publishers rejected their manuscript. (One response: Elf on the Shelf is destined for the damaged goods bin.) Pitts, 38, and Bell’s father owned a small steel fabrication company at the time; he let them squat in a small back office. They funded production with the sale of Pitts’ Pennsylvania house and a newly opened credit card. That first year, every single Elf on the Shelf unit sold. “We just were three strong-willed women who made it happen,” Aebersold, 64, recalls. Pitts agrees, citing her sister’s “incredible ability” to ignore naysayers and focus on her dream.

The women deliberately started small, in two local markets: Marietta, Ga., where the company is based, and Charlotte, N.C. Attending community holiday festivals, they sold the product out of a trailer. The events were short, lasting only a few days. “Families would experience the Elf on the Shelf; when we left there would be a vacuum,” Pitts explains. Storeowners began reaching out, hoping to appease the demand of their customers. By the end of 2005, eighteen storefronts carried Elf on the Shelf.

Friends helped out with the burgeoning company, traveling from marketplace to marketplace. “There would be four of us in one hotel room, just like in college—like a sorority thing,” Aebersold says. “But we had a lot of fun.” Profits from 2005 funded the following year’s production, and profits from 2006 paid for 2007. That year, a paparazzo snapped actress Jennifer Garner carrying the Christmas toy, and the blogosphere went wild. A few weeks later, Pitts got an early morning call from her mom, who was on a book tour. “She was screaming, ‘We’re on the Today Show!’ I thought, what do you mean, there’s [an elf] in the background?” Today picked up a Dallas affiliate’s segment on the book. “They basically reran the package on national television without us knowing anything about it,” Pitts recalls.

The response was so great that Aebersold, Bell, and Pitts mobilized the Elf Emergency Response Team (EERT), a group of friends who gave up their weekends to assist the family. PayPal shut down Elf on the Shelf’s website to manage the traffic surge. “We had hundreds of voicemails, we had thousands of orders and it definitely was a turning point for the brand,” says Pitts. “We ended up turning around every single order in two days. If we had failed, we probably wouldn’t be here at this point.”

Next came the 2009 launch of a virtual North Pole on their website. Trick 3D, an animation studio owned by Pitts’ high school friend, created the interactive experience for Elf on the Shelf customers and fans. “Everyone, depending on his age, had a different idea of what the North Pole looked like or how it felt,” she says, remembering brainstorm sessions. “An animated series seemed like the next natural step,” Aebersold says. “It never occurred to us that we needed somebody to broadcast it. We just assumed someone would.” That naiveté worked; last year, CBS aired The Elf on the Shelf: An Elf’s Story.

This past year, the rapidly growing franchise hit a literal new high. An Elf on the Shelf balloon floated alongside Buzz Lightyear in the Macy’s Thanksgiving Day Parade. The brawn behind the float’s appearance? Charlsie Niemiec, a 24-year old marketing manger at CCA&B. “Just as Chanda is dogged and determined, so too is our own Charlsie,” Pitts says. “I don’t think she’s every been okay with ‘no.’” Niemiec emailed the parade team for several months, calling them and leaving voicemails. She sent snail mail letters from scout elves at the North Pole. Her persistence paid off. “They emailed us back at Santa’s Workshop instead of any of our individual emails. We were very lucky, considering the high volume of emails that come in every day, to catch that specific message.” They set up a phone call and were told they had just 30 minutes—and the balloon team bit. “I think this year the Macy’s parade was really looking for some type of symbol of Christmas to add into it.”

Their success undeniable, Aebersold, Bell and Pitts have not escaped criticism. The Elf on the Shelf embodies, He sees you when you’re sleeping/He knows when you’re awake—lines disturbing to the cynical adult or Santa-fearing child. “It really breaks my heart to have people think it’s creepy,” Aebersold says, her voice quaking. “That is not the intent, and that is not the way we celebrated the tradition in our house. The way we want children and parents to look at the elf is: Who doesn’t want a best friend who is going to Santa to tell him how great you are?”

Shrugging off negativity, Pitts’ advice for other entrepreneurs is to do the same. “I’ve always been one who believes that you can do whatever it is you put your mind to if you’re willing to work hard enough,” she says. The trio’s love of Christmas may seem twee to some, but it’s the magic sauce behind Elf on the Shelf’s millions. “If we were going to be successful, we had to get people to embrace the brand.” They’ve always focused on creating family moments, and Aebersold says they will continue to do so. More scout elves, or something completely new? “Truly only Santa knows,” she says. “But [he] has an incredibly exciting something special for next year.”

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